Due Diligence on Deals Delivers Dividends

Consolidation in financial services continued apace in 2000 and 2001.

The trend towards consolidation in the financial services industry continued apace in 2000 and 2001. Total deal volume in 2000 was in excess of $120 billion, representing 304 transactions. Giant money center banks like Chase Manhattan, Bank of New York, and Citicorp accounted for over 15 mergers and acquisitions. Among the top 10 deals of 2000 were Chase's acquisition of J.P. Morgan, and Citigroup's purchase of Associates First Capital Corp. In addition, FleetBoston, in acquiring Summit Bank, expanded its reach outside of New England into the lucrative metropolitan New York market.

Washington Mutual's acquisition of Dime Bancorp, however, creates significant challenges for achieving desired synergies. While Washington Mutual is known in the area for its mortgage business, it has not had a retail presence there. The bank plans to use Occasio, its retail "store" initiative, to expand its brand presence. Citizens Bank, Providence, R.I., is acquiring Mellon's retail branches, making it New England's second-largest bank, after FleetBoston, and breaking into the nation's top 20 list.

Hope springs eternal. The M&A landscape is littered with deals that failed to achieve announced synergies and left shareholders disappointed. The reasons for most failures are the inability to integrate technology to achieve cost savings, efficiencies, and enhanced customer relationships, and dissonance between the merging organizations' cultures. If both of these elements are attended to early in the process, the likelihood of success is far greater.

In this Darwinian environment, survival will go to the biggest, strongest and smartest. The clever banks are those that have come to understand that strategy and technology have a symbiotic relationship. Added to this is the opportunity for product extension, reaching current and target customers with a supermarket of financial services. Recent examples confirm this trend. MetLife becomes MetLife Bank; AXA reinvents itself from insurance to AXA Financial; Citigroup absorbs Travelers, Salomon, Smith Barney and numerous asset management firms. In the end, there may well be fewer than a dozen mega-financial institutions serving a huge number of diverse clients.

To become attractive targets in this buyers' market, small and medium sized banks are cleaning up their infrastructure and IT organizations. One of the things that acquirers look for is the ease with which the target's technology can be integrated. This pre-acquisition activity requires partnership with an expert mergers and acquisitions (M&A) IT services organization. M&A due diligence provides buyers with pre-deal analysis of the strengths, weaknesses, and compatibility issues of their potential acquisitions.

An example of early intervention leading to great success is the merger between BNP, a large retail bank based in Paris, and Paribas, an institutional bank based in London. BNP Paribas turned to IBM for its extensive M&A experience to help migrate to a single platform, unify customer relationship management, and rationalize its processes. As IT Program Office Manager, IBM used its proven methodology to help the client exceed targeted synergies. Ideally, work would have begun with due diligence strategy and pre-deal planning, but regulatory issues prevented these assessments. Once the deal was public, a comprehensive assessment of both firms' technologies was conducted. A rule of thumb, which serves financial organizations well, is to choose systems and applications from either Bank A or B, not try to create an entirely new "C" system.

Once the assessment phase is complete, IT and line-of-business leaders work together to create the target model definition-an agreement on what the merged entity would be. Priority is given to users' needs and preferences to reduce resistance and accelerate change. Then, a comprehensive transition plan is developed, tackling every aspect of the change, including communications and culture/organization change. This roadmap has given many IBM customers the means to achieve a net profit growth.

The M&A lessons are clear: early attention to IT needs, compatibilities, and integration impediments plus deliberate attention to culture, change management, and communications can help accelerate merger success.

Any questions regarding IBM Global Services / BIS solutions in banking can be addressed by Al Uretsky at auretsky@us.ibm.com or (516) 349-3391.

This guest column, a regular feature in Bank Systems & Technology, allows industry executives and experts to discuss a key bank technology topic. If you would like to contribute, please send requests by e-mail to Steven Marlin, BS&T executive editor, at smarlin@cmp.com.